Housing finance companies: HFCs urge RBI to remove strict asset classification guidelines
In a two-page letter, HFCs said the new rules would force a borderline borrower to slip into the NPA category, ending payments altogether. Under the new RBI rules, loan accounts can only be upgraded to the NPA “standard” if all interest and principal arrears are paid by the borrower.
“Once a borrower is actually in default of more than 3 IMEs, it is very difficult for them to pay all the overdue IMEs at once and update the account,” HFC said in the letter. “In our experience, borderline borrowers go out of their way to pay for an IME, if only to avoid being classified as an NPA.
HFCs said the new rules would put additional pressure on their capital and lead to higher refinancing costs.
“Even with monthly cash flow and improved loan-to-value ratios, the financial system will end up showing higher NPA levels in an artificial and avoidable way, which will put increased pressure on lender capital,” said mortgage lenders. “All refinancing institutions will ask for more margins to cover the refinancing or ask us to exclude the APN and loans owed from the portfolio offered as collateral, even if the account is mobile.”
Lenders have also argued that since these overdue borrowers will need to be reported to credit reporting bureaus as NPAs, this will cripple them, forcing the borrower into long-term default.
Currently, all 90 Day Past Due Loans (DPDs) should be treated as NPAs. If the borrower brings their loan account below 90 DPD status, non-bank lenders treat the account as a standard asset even though the account may still have past due IMEs. The new RBI rules require NBFCs to treat these accounts as NPAs until the borrower updates the account to pay any IMEs owed.
The banking industry follows an automated system of marking accounts as NPA, under which accounts are marked as NPA on the day the account becomes more than 90 days past due. However, in many NBFCs this ranking is done after the 90 or 180 days have passed.
In general, many non-bank lenders improve NPAs because overdue accounts are reduced to less than 90 days, while banks don’t upgrade an NPA until all overdue amounts are collected. With these changes, standards have become largely congruent between banks and NBFCs.